CRM2: What You Need to Know

As of July 15, 2016, the final implementation stages of Client Relationship Model – Phase II (or CRM2) are now in place. CRM2 is a collection of rules introduced by the Canadian Securities Administrators (CSA), requiring enhanced fee and annual performance disclosure to clients.

Specifically, registered firms will now need to¹:

Provide an annual report on charges and other compensation that shows, in dollars, what the dealer or advisor was paid for the products and services it provided; and

Provide an annual investment performance report that discloses:

Deposits into, and withdrawals from, the client’s account

The change in value of the account; and

The percentage returns for the previous year, as well as the previous 3, 5, and 10 years.

Why is CRM2 happening?Following the global financial crisis in of 2008-2009 there have been sweeping regulatory changes that call for greater fee-transparency. The CSA has implemented CRM2 to regain and strengthen investor confidence in the market, similar rules have been implemented in the UK, and Australia and are underway in other developed markets such as Germany.

CRM2: An Opportunity to Demonstrate the Value of Financial AdviceFinancial advisors have the challenge of catering to a broad range of client goals, needs, investment horizons and risk tolerance. Additionally, they are expected to be well versed on different capital markets, asset classes and investment vehicles. Their services include financial planning, portfolio composition, asset allocation, retirement planning, trust and estate planning, referrals to accountants as well as legal and tax specialists -- the list goes on. Surely, all this worth something to investors? While CRM2 calls for greater transparency in the advisor-client relationship, it also presents an opportunity for advisors to justify expertise and demonstrate their value add.

Mutual Funds: Where Do the Fees Go? A Quick BreakdownClient fees pay for services provided by:

The fund manager;

Dealer or firm where an advisor is registered; and

Taxes.

Fund manager services include the buying and selling of securities inline with an investment mandate, to meet an investment goal. Fund managers also keep records of the funds they run as well as arrange for accounting, audit legal and custodial services.Dealers or financial advisors specialize in developing investment profiles for clients, that is, understanding their financial needs and risk tolerance and guiding them down a path that is conducive to financial success. Advisors buy and sell units of funds on behalf of their clients and also maintain detailed records of their accounts, routinely providing accounting statements.Lastly, taxes include GST and HST, which are charged on fees and services rendered.

A Few Gray AreasUnder CRM2 there is no deadline as to when trailers will stop. Regulators are reportedly gathering ideas from other major financial markets as well as consulting members of the investment community to decide if they will put an end to embedded compensation or trailers. Trailing commissions are a portion of a fund’s management expense ratio (MER) and are paid out to the advisor for the length of time an investor holds a fund.